What if the RMB and Dollar were the Same...

Today the Renminbi broke the 7.5 barrier against the dollar. Given that the Canadian dollar recently reached parity with its southern counterpart, I started to wonder what a one-to-one dollar-Yuan ratio would mean for prices here. The more that I thought about it, the more it because clear that there are a lot of things that would still be reasonably priced.

The obvious one, of course, is beer from the corner store. I pay 2 kuai, and 2 dollars for a big boy isn’t that unreasonable. Buses are typically 1 yuan, and that would be fair in almost any currency. Other things that would be reasonably priced, were they priced in dollars include bicycles (200), fried noodles (5), a very modest 2-bedroom Beijing apartment (2000), and knockoff DVDs (7).

Think about that for a minute: if you increased some prices by 750%, they still wouldn’t be outrageous. However, this argument hides the obvious fact that most things foreigners and rich Chinese buy are actually priced similarly to products abroad in real terms. Cocktails in a bar can easily run 60 RMB. Brunch would be about 100, and even a moderately upscale restaurant in Shanghai will cost you about 150. Unbelievably, movie tickets in China are often about 10 dollars US, an outrageous sum.

What does all this mean? The clear answer seems to be that Chinese live in a two completely separate worlds. It is like the John Edwards’ two John Edwards’ campaign themes have merged (‘China is evil’ and ‘there are two Americas’). Prices vary so widely that it is almost impossible to imagine that they could coexist. And it is not even by geographic location. Looking west from my apartment are 2-bedrooms going for the rock-bottom price of 1,500 RMB a month. To the north there is a complex that charges only slightly less than what you might pay in Brooklyn.

Incomes and lifestyles are so differentiated that people self-sort themselves. The reason that apartments next to one another can charge such different rates is that people living in the expensive ones would never be willing to drop their living standards far enough to save the money . The same is true for restaurants, where the cheapest are also often the shadiest.

Beyond the income disparity is the idea among Chinese that if you have money, everyone should know. Why would you live in a shabby building for a few years if you are making good money? People might think that you are unsuccessful. It is not enough to have the money, it is important to flash it as well. So, were parity to hit, only the richest foreigners would be able to keep up their lifestyles.

Of course, as the Renminbi appreciates, for most Chinese the impact is more subtle than it is for foreigners. Most Chinese do not earn their money in dollars, or Euros, and few go abroad even today (although many more than in the past). Clearly for exporters a rising Yuan is not a good thing, but for most of the population it does mean that foreign goods are cheaper. As for Chinese goods, as long as inflation remains in check, consumers could care less what the dollar equivalent is.

For the foreigners, however, a one-to-one ratio would be a burden indeed. After all, who would want to spend 60 dollars on a cocktail? It would be a brilliant way to reduce the value of the American debt the Chinese government holds, however.

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That would be a sad day...

On October 26th, 2007 Anonymous says:

If the RMB and Dollar ever reached parity. In the long run, anything is possible, but things would have to change dramatically (worse for the US) for this to happen.

Good points about the radically different lifestyles of Chinese people... the disparities are saddening and incredibly large.

no economist, but...

On October 26th, 2007 Anonymous says:

If I'm reading this rightly, if, all other things (my salary and prices, in particular) being equal (the same as now, in other words), but the yuan and dollar were on a 1:1 ratio, then imported beer would suddenly be only marginally more expensive than the Tsingtaos I buy from my local market? If that is what would happen, then....

....BRING IT ON!!!!!!!!

Of course, I'm paid in yuan, not in any foreign currency.

But you'll have a hard time inspiring sympathy for my fellow expats weeping into their $60 cocktails, slowly savouring the one drink they can afford this week. The laowai life is grossly overrated and overpriced. If yuan/dollar parity can cut the price of a decent imported brew to something reasonable, I might opt back in (albeit on a very limited basis), otherwise, nah, bugger it.

Chris Waugh
wangbo.blogtown.co.nz

DVD's

On October 26th, 2007 Anonymous says:

I don't understand the fluctuations in chinese pirated DVD prices. In chengdu they were down to 3.5 a disk (a couple of people set up big carts on a university campus), around half of what they were a few years ago. i would have thought there'd be some disruption of the supply even if crackdowns on copyright fraud are only sporadic and half-hearted.

RMB vs US Dollar

On November 13th, 2007 US buyer (not verified) says:

Greetings my Friends,

I am a US buyer with products I have manufactured in Ningbo which are shipped to the US where I sell them in US retailers Walmart, Kmart etc.

I have spoken with a large number of companies in the US since the rise of the RMB while the USD drops, imagine if you will me and all of the other US companies with products manufactured in China were to move our operations to another country, one of these companies is in the statges of moving his operations to the US border of mexico wher he gets a work visa for the mexican workers, this reduces costs that he used to pay at the port which for his products were at 9%, he also reduced shipping costs being he does not need to ship any goods, he also reduced turn around time being they do not have to wait for shipments etc.

Now the Chinese comapnies have no exports into the US being his product has patents in China, US, Canada, Australia, Mexico, UK, which I know of, so he sells 70% of his good in the US and ships out to the other counrties, The china Manufacturer has lost income and had to reduce staff = 238 employees looking for work in China, they can not find work of course because the other manufacturers also lost business and let workers go, so I am glad you think the US dollar value going lower is good for China but I have a feeling the crime rate will be rising while the RMB rises, the US knows all about this after all do you know the crime rate here compared to China ?

Just thought I would give my 2 cents on this subject, oh I hope you enjoy the cheap imported beer if you still have a job and do not have to support your relatives that live with you because they lost there jobs at the factory.

US buyer.

I've heard this argument

On November 13th, 2007 Fascinated Laowai (not verified) says:

It's great to hear this opinion from a (presumably) Chinese exporter. Why? Because I have heard EXACTLY this case before, except made by Americans and Europeans. Wasn't the whole uproar in the US that factory workers were losing jobs because of currency manipulation (only partially true since the US would not have been competitive in manufacturing anyway. China took jobs from the US, which should have translated into a transformation of the American economy into a more knowledge based system, which it primarily did.

Suddenly China is letting the markets dictate the exchange rate (only partially mind you), and it is an outrage against the poor peasants of China.

This was a false argument when Americans made it, and it's absolutely ludicrous to hear Chinese complain that their currency might appreciate to a realistic, market-drive level. Why not switch to imports like so more American firms did?

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